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How you can save tax on school fees

There’s an often-overlooked tax relief option in the Income Tax Act.

The positive correlation between a population’s general level of education and its economic development, levels of employment, average income, health and reduced crime rates is undisputed. In our sluggish economic environment – with nominal salary increases and rising job losses – most South Africans are seeking ways to reduce their expenditure and their tax burden. One such method is the often-overlooked tax relief provided to employees under Section 10(1)(q) of the Income Tax Act.

The norm is for employees to receive their income after PAYE, UIF and other deductions and to thereafter pay their children’s school fees from their net income. However, in terms of Section 10(1)(q) of the Income Tax Act, employers are entitled to redirect a portion of their employees’ remuneration towards school fees in the form of a bona fide scholarship or bursary – thereby effectively reducing the tax liability of the employee.

Case study 1: James

By way of example, James earns a gross monthly income of R15 000, or R180 000 for the tax year. He has one child at school whose school fees amount to R18 000 per year. By restructuring his salary in terms of Section 10(1)(q), the tax deduction would afford him an after-tax amount of R3 404.64 in the tax year. This would be calculated as follows:

 

Case study 1: James

 

Before Section 10(1)(q) deduction

After Section 10(1)(q) deduction

Gross annual salary

R180 000,00

R162 000,00

School Bursary

n/a

R18 000,00

Total renumeration

R180 000,00

R180 000,00

Less: Bursary exemption

n/a

-R18 000,00

Taxable income

R180 000,00

R162 000,00

PAYE on taxable income

-R18 180,00

-R14 940,00

UIF

-R1 784,64

-R1 620,00

Net income

R160 035,36

R145 440,00

School fees per annum

-R18 000,00

paid via bursary

Balance

R142 035,36

R145 440,00

Gain

 

R3 404,64

In order for a Section 10(1)(q) deduction to apply, the following requirements must be met in terms of the bursary or scholarship:

  • The scholarship or bursary must be a bona fide scholarship or bursary
  • It must be granted to enable or assist a person to study
  • The student or learner must study at a recognised educational or research institution

It is important to note that, in order to qualify, the gross remuneration threshold for an employee is set at R600 000 per year. Those earning in excess of this threshold do not quality for the exemption. The current exemption thresholds for this benefit are:

  • Grade R to Grade 12 or NQF level 1 – 4: R20 000 per annum per child
  • NQF level 5 – 10: R60 000 per annum per child

In the event that the employee’s school fees total more than the thresholds, the tax exemption is capped at the threshold. For instance, if the school fees are R26 000 per year, R20 000 will qualify for the tax exemption and the remaining R6 000 will be taxed as a fringe benefit. As these exemptions apply per child, the tax saving could become quite significant should you have more than one child at school.

Case study 2: Aimee

To demonstrate this, we have assumed that Aimee earns a gross monthly income of R40 000, totaling R480 000 for the tax year. She has three children whose school fees each total R20 000 per annum, totaling R60 000 for the year. If Aimee and her employer make use of the Sec. 10(1)(q) deduction, she would save R21 435.50 in tax for the year.

Aimee

 

Before Sec. 10(1)(q) deduction

After Sec. 10(1)(q) deduction

Gross annual salary

R480 000,00

R420 000,00

School Bursary

n/a

R60 000,00

Total renumeration

R480 000,00

R480 000,00

Less: Bursary exemption

n/a

-R60 000,00

Taxable income

R480 000,00

R420 000,00

PAYE on taxable income

-R106 455,00

-R85 019,50

UIF

-R1 784,64

-R1 784,64

Net income

R371 760,36

R333 195,86

School fees per annum

-R60 000,00

paid via bursary

Balance

R311 760,36

R333 195,86

Gain

 

R21 435,50

 

You will note that Aimee’s gross remuneration remains unchanged; however, her remuneration now includes the bursary allocation as a tax exemption and as a result she pays tax on a lower amount. The employer will also receive a tax benefit because the liability for SDL on the exemption portion would fall away. Therefore, both Aimee and her employer will benefit from a reduced tax liability.

It was the late Nelson Mandela who famously said that “education is the most powerful weapon which you can use to change the world”. Section 10(1)(q) provides an excellent way for parents to more efficiently fund their children’s education.

ADVISOR PROFILE

Gareth Collier

Crue Invest (Pty) Ltd

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